Yahoo Finance A Sliding Share Price Has Us Looking At Atrium Mortgage Investment Corporation's (TSE:AI) P/E Ratio
Unfortunately for some shareholders, the Atrium Mortgage Investment (TSE:AI) share price has dived 36% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 29% over that longer period.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Check out our latest analysis for Atrium Mortgage Investment
How Does Atrium Mortgage Investment's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 9.69 that there is some investor optimism about Atrium Mortgage Investment. As you can see below, Atrium Mortgage Investment has a higher P/E than the average company (7.1) in the mortgage industry.
That means that the market expects Atrium Mortgage Investment will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Atrium Mortgage Investment increased earnings per share by 2.6% last year. And its annual EPS growth rate over 5 years is 1.4%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Atrium Mortgage Investment's P/E?
Atrium Mortgage Investment has net debt worth 70% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Atrium Mortgage Investment's P/E Ratio
Atrium Mortgage Investment trades on a P/E ratio of 9.7, which is fairly close to the CA market average of 9.9. It has significant debt, though the market seems to take confidence from recent earnings growth. What can be absolutely certain is that the market has become more pessimistic about Atrium Mortgage Investment over the last month, with the P/E ratio falling from 15.2 back then to 9.7 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Atrium Mortgage Investment may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
